Japan banks in focus after Resona

MarikoAndo

TOKYO (CBS.MW) - Investors will be waiting with bated breath as Japan's top banks start reporting next week as many are wondering if there are any more Resona banks out there after the country's fifth-biggest bank was bailed out last week.

All of Japan's "big four" banks will report fiscal 2002 earnings on Monday. Analysts say that poor results are almost factored in, and the market's focus now is on the amount of bad loans and their business outlooks.

"Banks have issued forecast revisions, so we think investors have turned their attention to other issues -- nonperforming loans, the overall stock market, and the possibility of injections of public funds," said analysts at the Nomura Institute of Research.

If the stock market plummets, some banks will likely seek funds from the government to shore up their depleted equity capital, they say.

Other analysts also say that investors are cautious because of the possibility that the government will inject public money into banks with unhealthy balance sheets in order to prevent the nation's financial system from collapsing. The bad loans are holdovers from the excesses of the 1980s so-called bubble-era, when banks lent money for speculative projects.

But if the government injects public money into a troubled bank, that could hurt shareholders as it accumulates preferred or common stock in return.

Such concerns are mounting after the government decided last weekend to inject public funds into Resona, Japan's fifth-largest bank, which was in trouble due to its low capital adequacy ratio. The ratio had fallen to 2.07 percent at the end of March -- way below the 4 percent required for banks operating domestically. Read full story.

The news put banking shares on a roller-coaster ride this week as shares plunged on the initial shock before they were bought back on signs the government is determined not to let banks fail.

With a leadership election within Prime Minister Junichiro Koizumi's Liberal Democratic Party coming up in September, some analysts say Koizumi could ill afford a financial crisis since he was the one who pledged to cut bank bad loans in half by 2005.

Analysts said that these shares are likely to be in flux next week until investors, after assessing banks' earnings, become convinced that others won't need government rescues.

Resona's (8308) shares plunged 17 percent on Monday, but they surged nearly 30 percent in the next three days. Investors may be buying back shares amid relief that the bank is no longer in danger, said independent analyst Yasuo Ueki.

On Friday, bank stocks were mixed amid reports that Hokkaido and Hokuriku banks might merge to create the country's second-largest regional lender. Also, the Tokyo metropolitan government is planning to launch a bank in fiscal 2004 to provide funds to cash-strapped small and mid-sized enterprises. Read Asian markets.

Mizuho Financial Group (8411), the world's biggest in terms of assets, swung wildly before ending at 76,500 yen on Thursday, up 3.2 percent for the week.

To ensure that the financial system remains stable after the government's bailout of Resona, the Bank of Japan further eased its monetary grip Tuesday by pumping more money into financial system.

Bank earnings

Investors are also paying close attention to the overall stock market as a further slide in stock prices could inflate banks' shareholding losses and make it more difficult for them to clean up their bad loans.

In late April, Mizuho Financial
MZHOF, -7.95%
widened its net loss estimate to 2.38 trillion yen ($20.5 billion) for the past fiscal year ended March, from an earlier forecast of 1.95 trillion yen, due to bigger-than-expected stockholding losses on the back of a slump in Tokyo stock prices.

UFJ Holdings
UFJHF
also cut its group earnings forecast late last month. The bank is expecting a net loss of 650 billion yen in the 2002/03 fiscal year, a sharp reversal from the net profit of 70 billion yen estimate in November.

Sumitomo Mitsui Financial Group
SMFJY
is now forecasting a group net loss of 470 billion yen, compared with the profit of 30 billion yen estimated in November last year.

Mitsubishi Tokyo Financial
MTF, -0.37%
cut its pretax profit forecast to a 405 billion yen consolidated loss from a 165 billion yen loss. But the bank still expects a net loss of 185 billion yen, unchanged from its previous projection.

According to Nomura, the banks' capital adequacy ratios were between 9 and 10.9 percent at the end of fiscal 2002. But if the Nikkei Average falls below 7,000 yen and approaches the 6,500-6,000 mark, then few banks will be able to maintain a capital adequacy ratio of at least 8 percent - the standard for banks operating internationally.

In the wake of the Japanese government's decision to rescue Resona, UBS Warburg analyst Katsuhito Sasajima thinks the government and the regulatory Financial Service Agency want Japan's big banks to achieve capital adequacy levels of at least 10 percent.

"In other words, the authorities would no longer find it acceptable for a bank to say its capital base is problem free simply because its BIS ratio was at the minimum internationally acceptable level....this appears to reflect the uncertainty that surrounds the financial system and ensure that a stable supply of capital can reach smaller business borrowers, and could also be designed to make up for any decline in equity capital resulting from future bad debt disposals."

At the end of last business year, both Mitsubishi Tokyo and Sumitomo Trust said they expected to have BIS (Banks for International Settlements) ratios of 10.5 percent. Mizuho Financial Group's BIS is expected at 9 percent, and SMFG at about 10 percent.

Analysts say they are also focusing on whether the government will decide to apply stricter criteria for using deferred tax assets as bank capital. Introducing tighter rules over the use of deferred tax assets may require more Japanese banks to have capital injections.

Deferred tax is intangible assets resulting from accounting rules that allow the losses from taxable bad-loan write-offs to be set off against future taxable income.

Dollar yen

Market players are also likely to pay close attention to the dollar's recent weakness against the yen as a further slide might knock Japanese exporters. A firmer yen makes Japanese products less price competitive in overseas markets, thus eat into exporters' earnings when exchanged into the home currency.

The dollar eased to the mid-115 yen level on Monday before the Bank of Japan reportedly intervened. The dollar traded at 117.62 yen on Thursday, up 1 percent for a week. Still, the U.S. currency is down more than 2 percent in the past four weeks.

Despite fears that a firmer yen would hurt the country's exports, Japan's Prime Minister Junichiro Koizumi is not expected to discuss currency matters with President Bush when the two leaders hold informal talks in Crawford, Texas Friday.

The two leaders are expected to talk about North Korea's suspected nuclear weapons program and about Japan's structural reforms. See full story.

Stocks to watch

Japanese consumer electronics giant Sony
SNE, +0.35%
will meet the press Wednesday to discuss its future business strategy, including restructuring plans.

Analysts say they are interested to hear about Sony's business plans particularly in the consumer electronics division, after the firm's mainstay unit reported big losses in the Jan.-March quarter.

Sony's (6758) shares have fallen over 22 percent since late April when it reported a massive earnings shortfall and warned profits would continue sliding this year. See full story.

Japan Telecom
JPNTY
(9434) will announce year-end earnings Tuesday. The company, owned 66.7 percent by British telecom giant Vodafone
VOD, +1.17%
is expected to report a net profit of 48.68 billion yen for the year ended March on sales of 1.77 trillion yen, according to a Nihon Keizai poll. The company booked a net loss of 65 billion yen a year earlier.

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